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Cablegate: Update On Chile's Economy: October 16 Sees Mixed Day In

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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI

SUBJECT: UPDATE ON CHILE'S ECONOMY: OCTOBER 16 SEES MIXED DAY IN
MARKETS

REFS: SANTIAGO 923 AND PREVIOUS

1. (U) SUMMARY: This is another in a series of updates on major
developments in Chile's economy in the face of global financial
turmoil. On October 16 copper prices and the stock market fell, but
the exchange rate appreciated. Finance Minister Andres Velasco said
in an interview that the Chilean economy was well protected from the
global crisis. Former Central Bank President Vittorio Corbo told a
public seminar economic growth would slow. An Embassy contact, on
several company and bank corporate boards, sees hard times for
Chile's smaller- to medium-sized enterprises. Chile's Construction
Association has been impacted by the crisis and is trying to spur
housing starts. END SUMMARY.

Copper Prices Fall Further
--------------------------

2. (U) Copper closed at approximately $2.21/pound, a drop of almost
5% on yesterday's price. This is copper's lowest price since March
2006.

Chilean Peso Edges Back Up vs. U.S. Dollar
------------------------------------------

3. (U) The exchange rate closed up at about 622 Chilean Pesos to 1
U.S. Dollar (an increase of less than 1% on yesterday's rate).

Small Decrease In The Stock Market
----------------------------------

4. (U) The IPSA fell by about 1.5% from yesterday's close.

Finance Minister Reassures Chileans
-----------------------------------

5. (U) Finance Minister Andres Velasco said in an interview that the
Chilean economy was well protected from the effects of the global
financial crisis. He underlined that Chile's banking sector was
strong and the fall of commodity prices would help reduce
inflationary pressures in the economy. Velasco said lower copper
prices would not affect Chile's fiscal policy. He noted Chile's
Sovereign Wealth Funds (worth more than $21 billion) and the Central
Bank's reserves (worth more than $22 billion) were stabilizing
forces that could help cushion Chile from some of the brunt of the
crisis.

Former Central Bank Head Predicts Slower Growth
--------------------------------------------- --

6. (U) Influential former Central Bank President Vittorio Corbo told
a public seminar that he expected Chile's GDP would grow by only 2
or 3% in 2009, as a result of the global financial turmoil. He
predicted unemployment would increase and the best solution would be
more flexibility in Chile's labor markets. Corbo said the crisis
would last one to two years and although national interest rates
would continue to fall, banks would maintain higher rates because of
continuing liquidity problems.

Private Sector Board Member Sees Hard Times Ahead
--------------------------------------------- ----

7. (SBU) An Embassy contact that sits on the corporate boards of
several companies and major banks in Chile, reported that she
thought the global financial crisis was going to have a significant
negative impact on small- to medium-sized firms. Access to credit
would continue to be a problem, causing a slow-down in investment
and even day-to-day operations. This would produce greater
unemployment. She also noted the Central Bank's ongoing injections
of liquidity into Chile's banking system were critical, having
staved off "big problems" for some of Chile's major banks.

Construction Association Wants To Spur Housing Starts
--------------------------------------------- --------

8. (SBU) Embassy contacts at Chile's Construction Association
(Camara Chilena de la Construccion -CCHC) believe the financial
crisis is impacting the construction sector. Many projects are
already well financed, insulating them somewhat from the reduction

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in liquidity among Chilean banks. However, new projects are being
postponed because of problems with access to credit. Public
infrastructure projects have been the main engine of growth for the
construction sector in 2008. Individual homes and real estate
construction have been weak and will likely see a further drop-off
due to the crisis. Average interest rates on mortgage loans have
reportedly increased from 5.6% to 6.2% in the last month. The CCHC
has been pushing the GOC to take steps to ameliorate the situation,
including subsidizing sales of new homes to encourage growth in
housing starts.
SIMONS

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